Indias Insurance Sector

Overview

INDIA is the 5th largest market in Asia by premium following Japan, Korea, China and Taiwan.
The US$ 30 billion insurance business in India is expected to grow 17 per cent in fiscal 2008-
09* if the countrys economy clocks 7.6 percent GDP. In fiscal 2007-08 life insurers grew their
business by 23.3 percent to Rs.930 billion while general insurers posted growth of about 14
percent in premium income to Rs 298 billion. Presently the total number of insurers registered
with the Insurance Regulatory and Development Authority (IRDA) stands at 42 : 21 in life
insurance and 21 in general insurance segments. Some joint ventures include Tata AIG, Bajaj
Allianz, ICICI Prudential, SBI Life, HDFC Standard Life, Birla Sunlife, Max New York Life
and Bharti AXA Life.

India is the fifth-largest country in Asia in terms of total insurance premium. The premium
income in the country increased to 4.7 percent of GDP in fiscal 2006-07 from 3.3 percent in the
fiscal 2002-03.Total premium in the insurance industry grew at a CAGR of 28.1 percent during
the same period. The life insurance sector grew at a CAGR of 29.3 percent outsmarting the
general insurance sectors CAGR of 21.3 percent.

The Indian insurance sector has a turnover of around Rs 26,287 crore. The current FDI in this
sector stands at around Rs 2500 crore and market experts expects FDI to zoom by about 2.5
times once the FDI cap is raised by another 23 percent to 49 percent.

The terror Pool, set up after 9/11 attacks, and being funded by the insurers currently has a corpus
of Rs 1000 crore. The settlement of the claims for Taj, trindent and Oberoi amounting to Rs 500
crore could be well taken care of. The urrent coverage is till March 31, 2009. It is expected with
renewals for next fiscal year, the Terror Pool fund will increase substantially. General Insurance
Corporation (GIC), the Indian reinsurer, is planning to rise terrorism insurance cover to Rs 1000
crore from Rs 750 crore. Currently any claim beyond Rs 750 crore is covered by international
insurers.


BILL TO UPSTAKE FDI

On the expected line of foreign investors, the Congress(I)-led UPA government in New Delhi
has introduced the Insurance Laws (Amendment) Bill 2008 in the upper house of Indian
Parliament on December 22, 2008 that seeks to raise the Foreign Direct Invest (FDI) cap in the
insurance sector from existing 26 percent to 49 percent. The government move is seen as the
UPA governments most significant and biggest reform measure in the financial sector since the
then Finance minister P. Chidambaram in his Budget speech announced plan to hike FDI in
insurance to 49 percent.

The Bill, once through in both houses of Parliament, will allow companies, exclusively into the
business of health insurance, to operate with a minimum paid up capital of Rs 50 crore against
the current minimum paid up capital of Rs 100 crore for any insurance business- Life or General.
For re-insurance business the minimum paid-up capital will be Rs 200 crore. The Bill when
translated into an Act would enable all the state-run general insurance companies- Oriental
Insurance, New India Assurance, United India Insurance and National Insurance to enter the
capital market to mop up funds.

The Bill also seeks to allow Lloyds of London to enter Indian insurance market as a foreign
company in joint venture partnership with local companies. The insurance regulatory body-
IRDA, would chart the terms and conditions for cancellation of registration. Business without
registration will invite fine up to Rs 25 crore. For not meeting the obligations for rural or social
sector or third party insurance of motor vehicles, fine up to Rs 25 crore will be slapped.

According to the Bill, no insurance policy can be challenged after a gap of five years. It will
protect the interest of policy holders against any possible litigation.

Besides Insurance Law (Amendment) Bill 2008, the government has also introduced another Bill
namely, Life Insurance Corporation (Amendment) Bill to raise its capital from existing Rs 5
crore to Rs 100 crore. This would enable LIC comply with IRDA norms.


Meanwhile, on the expected line of foreign investors, the Congress(I)-led UPA government in
New Delhi has introduced the Insurance Laws (Amendment) Bill 2008 in the upper house of
Indian Parliament on December 22, 2008 that seeks to raise the Foreign Direct Invest (FDI) cap
in the insurance sector from existing 26 percent to 49 percent. The government move is seen as
the UPA governments most significant and biggest reform measure in the financial sector since
the then Finance minister P. Chidambaram in his Budget speech announced plan to hike FDI in
insurance to 49 percent.

The Bill, once through in both houses of Parliament, will allow companies, exclusively into the
business of health insurance, to operate with a minimum paid up capital of Rs 50 crore against
the current minimum paid up capital of Rs 100 crore for any insurance business- Life or General.
For re-insurance business the minimum paid-up capital will be Rs 200 crore. The Bill when
translated into an Act would enable all the state-run general insurance companies- Oriental
Insurance, New India Assurance, United India Insurance and National Insurance to enter the
capital market to mop up funds.

The Bill also seeks to allow Lloyds of London to enter Indian insurance market as a foreign
company in joint venture partnership with local companies. The insurance regulatory body-
IRDA, would chart the terms and conditions for cancellation of registration. Business without
registration will invite fine up to Rs 25 crore. For not meeting the obligations for rural or social
sector or third party insurance of motor vehicles, fine up to Rs 25 crore will be slapped.

According to the Bill, no insurance policy can be challenged after a gap of five years. It will
protect the interest of policy holders against any possible litigation.

Besides Insurance Law (Amendment) Bill 2008, the government has also introduced another Bill
namely, Life Insurance Corporation (Amendment) Bill to raise its capital from existing Rs 5
crore to Rs 100 crore. This would enable LIC comply with IRDA norms.

The Associated Chambers of Commerce and Industry of India (ASSOCHAM) has projected that
foreign direct investment (FDIs) will increase in insurance sector by $ 0.46 billion in next 2
years and likely to touch $ 0.96 billion as it is still regulated. A Paper on FDIs Prospects in
Insurance Sector brought out by the ASSOCHAM says that currently the total insurance market
in India is about $ 30 billion, in which the element of FDIs is $ 0.5 billion. This is 1.6 percent of
total insurance business in India.

Despite, insurance being a highly regulated sector, however, in the first five months of current
calendar, i.e. between January to May, it could attract FDIs of $ 217.97 million which by any
standard is not too insignificant. If the insurance sector is opened up to an extent of 49 percent
for FDIs, in next 2 years, i.e. by 2010, the FDIs contribution to insurance business would touch
nearly $ 2 billion. Currently, only 26 percent of FDIs are permitted in insurance sector, the
chamber expects. It is pointed out that the domestic insurance sector has been growing at an
average speed of nearly 200 percent and that is why the chamber is of the view that by 2012, the
total insurance business would touch $ 60 billion size.

In the life insurance sector particularly on FDIs front, the growth that has taken between 2006
and 2007 is estimated to be around 270 percent. This itself speaks the significance and
importance, investors are attaching to both life insurance and non-life insurance sector.

Indias insurance market lags behind other economies in the baseline measure of insurance
penetration. At only 3.1 percent, India is well behind the 12.5 percent for the UK, 10.5 percent
for Japan, 10.3 percent for Korea and 9.2 percent for the US. Currently, FDI represents only
Rs.827 core of the Rs.3179 crore capitalizations of private life insurance companies. FDI in
insurance would increase the penetration of insurance in India, where the penetration of
insurance is abysmally low with insurance premium at about 3 percent of GDP against about 8
percent global average. This would be better through marketing effort by MNCs, better product
innovation, consumer education etc.

The chamber President Sajjan Jindal maintains that insurance sector in India has the capability of
raising long term capital from the market as it is the only avenue where people put in money for
as long as 30 years even more. An increase in FDI in insurance would indirectly be a boon for
the Indian economy, the investments not withstanding but by making more people invest in long
term funds to fuel the growth of the Indian economy, he feels.

Since end of 2000 when insurance was privatized, life insurance company promoters pumped in
Rs 21,000 crore so far. The distribution network also expanded significantly. In the second
quarter of fiscal 2008-09 1480 branches were added including 1293 branches set up by private
sector life insurers. During this period the life industry added 53332 employees to their payrolls.
The number of pay-roll employees now crossing over 300,000. Of the total 10,037 branches of
life insurance companies around 7,000 are in semi urban and rural areas. By the end of 1st
quarter of current fiscal (2008-09) the total assets of the life insurance companies stood at Rs
857,500 crore. Of this, Unit Linked Policies ( ULIP) accounts for Rs 140,000 crore. The total
premium of all insurance companies taken together aggregated to Rs 86,500 crore in the first half
of current fiscal.

Yet another highly prospective business segment is health insurance. According to a CII-E&Y
study report, the health insurance premium income

is likely to touch Rs 30,000 crore in 2015 from the existing Rs 4,000 crore. The premium was Rs
670 crore in fiscal 2001-02. It is expected that the hike in FDI for the insurance sector from 26
percent to 49 percent will boost the healthcare business.

The immense business potential in health sector is reflected in the fact that only about 1 percent
of the countrys population is presently covered under health insurance policies. The fillip to the
health insurance segment will also come when the Insurance Regulatory and Development
Authoritys (IRDA) recommendation to bring down capital requirements for stand-alone health
insurance companies from Rs 100 crore to Rs 50 crore. In fact, the Insurance Laws
(Amendment) Bill 2008 makes provision to allow companies, exclusively into the business of
health insurance, to operate with a minimum paid up capital of Rs 50 crore against the current
minimum paid up capital of Rs 100 crore for any insurance business- Life or General. This is
expected to prompt entry of more health insurance companies into the country.

Micro insurance is yet another which is yet to be explored optimally. The CII-E&Y report says
that micro health insurance schemes in India have achieved good enrolment levels among their
target populations including poor. Out of the total insurance premium of Rs 100,000 crore
collected in fiscal 2007-08, micro-insurance accounted for a meager Rs 125 crore.

The CII-E&Y recommendations include introduction of risk-based capital in the life insurance
segment, institutionalization of underwriting and marketing skills in the general insurance
segment, articulation of proper reforms and industry compliance for health insurance and
regulatory and industry endeavor to promote deepening of markets for micro insurance.

The health expenditure across the country was Rs 180,000 crore in 2007. With healthcare costs
escalation, rising demand for healthcare services and limited access of the low-income group to
quality healthcare, health insurance is emerging as an alternative mechanism for financing
healthcare. And with merely 12 percent of the population being covered, companies are looking
at the health insurance space as a lucrative segment.

The state-owned companies constitute nearly 70 percent of the health insurance market and
private companies account for the remaining 30 percent As the out-of-pocket expenditure on
healthcare is pegged at more than 70%, private insurers are treating this as an important target
market. ICICI Prudential has started a division catering to health insurance, while Bupa-Max is
awaiting the IRDAs approval to launch health insurance schemes. LIC recently unveiled its
health insurance scheme to compete with players such as Apollo, Star and Bajaj Allianz.

Bajaj Allianz head of health insurance Shreeraj Deshpande said, We are going to the semi-
urban and rural areas. We are targeting the informal sector by having viable products and
communicating through NGOs. The channels of reach are also seeing a change, with companies
tapping banks databases in an attempt to reach people. Banks will play an important role in
selling policies, given the difficult environment. The entry of additional companies into the
health insurance sector will depend on regulations and companies abilities to make profits, he
said.

The growth in healthcare will be supported by standalone health insurance companies and new
players. Moreover, domestic life insurance players are augmenting their product portfolios with
innovative standalone health insurance products for catering to the growing health insurance
segment, the report stated.

Commenting on the prospect of the general insurance industry in India a Moodys-ICRA report
on Indian General Insurance Industry Outlook said: The outlook for the general insurance
industry in India is stable based on Moodys expectations for steady fundamental credit
conditions in the sector over the next 12-18 months. With the Indian economy forecast to grow at
7.5% in 2008 and given rising income levels and higher risk awareness among insureds, the
countrys insurers are optimistic about demand for their products. However, intense competition
from new entrants, deregulation and a moderation in returns from the equities market will
pressure pricing and ultimately short-term profitability.

At the same time, despite rising inflation and a severe correction in the stock market (the key
Sensex index fell 26% in 1Q2008), the prevailing view in Asia is that while China and India are
not insulated from the credit crisis afflicting the US and EU, domestic demand is strong enough
to support GDP growth1. Being less export dependent, India is also less vulnerable than some of
its neighbors, the Report pointed out.

According to Moodys-ICRA report published in April 2008, Rising income levels, low
penetration for most consumer products, availability of financing and changes in lifestyles/
aspirations are likely to sustain consumer demand over the next few years. In the short term, the
focus on infrastructure development will keep the economy going, even if the tightening in credit
leads to a slowdown in consumer spending.

Furthermore, over the medium and long term, Indias insurance market will continue to
experience major changes as its operating environment increasingly deregulates. On the one
hand, a mix of new products, new delivery systems and a greater awareness of risk will generate
growth. On the other hand, competition will remain intense as private sector insurers and those
about to enter India seek to win market share from the more established public sector entities,
the report indicated.